Amazon.com 2005 Annual Report Download - page 70

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AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The application of SFAS 123(R) had the following effect on reported amounts relative to amounts that
would have been reported using the intrinsic value method under previous accounting (in millions, except per
share amounts):
Year Ended December 31, 2005
Using Previous
Accounting
SFAS 123(R)
Adjustments
As
Reported
Income from operations ...................................... $432 $— $432
Income before income taxes ................................... 428 — 428
Income before cumulative effect of change in accounting principle .... 333 — 333
Net income ................................................ 333 26 359
Basic earnings per share:
Prior to cumulative effect of change in accounting principle ...... $0.81 $ — $0.81
Cumulative effect of change in accounting principle ............ — $0.06 0.06
$0.81 $0.06 $0.87
Diluted earnings per share:
Prior to cumulative effect of change in accounting principle ...... $0.78 $ — $0.78
Cumulative effect of change in accounting principle ............ — $0.06 0.06
$0.78 $0.06 $0.84
Cash flow from operating activities ............................. $740 $ (7) $733
Cash flow from financing activities ............................. (200) 7 (193)
The fair value for each stock option granted was estimated at the date of grant using a Black-Scholes option-
pricing model, assuming no dividends and the following assumptions:
Year Ended December 31,
2005 2004 2003
Average risk-free interest rate .......................................... 3.9% 2.9% 2.5%
Average expected life (in years) ........................................ 4.5 3.3 3.3
Volatility .......................................................... 43.6% 57.9% 77.7%
Stock-based compensation for the years ended December 31, 2004 and 2003 was determined using the
intrinsic value method. The following table provides pro forma financial information as if stock-based
compensation had been computed under SFAS 123 (in millions, except per share data):
Year Ended December 31,
2004 2003
Net income—as reported ............................................... $588 $ 35
Add: Stock-based compensation, as reported ................................ 58 88
Deduct: Total stock-based compensation determined using a fair value-based
method for all awards ................................................ (81) (94)
Net income—SFAS 123 fair value adjusted ................................. $565 $ 29
Basic earnings per share—as reported ..................................... $1.45 $0.09
Diluted earnings per share—as reported .................................... 1.39 0.07
Basic earnings per share—SFAS 123 fair value adjusted ...................... 1.39 0.08
Diluted earnings per share—SFAS 123 fair value adjusted ..................... 1.33 0.07
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